Mortgage Rates May Cool After a Period of Strong Growth

By | March 22, 2021

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.


European stocks slid on Friday, erasing a large part of the weekly gains, after France imposed fresh regional lockdowns to curb the spread of the coronavirus amid some slowing of vaccination rates in some countries. The pan European STOXX 600 fell 0.6%, tracking a dour Wall Street overnight after U.S. bond yields surged. Bond markets have experienced sharp moves over the week as the Federal Reserve said it expected higher economic growth and inflation in the United States this year, although it repeated its pledge to keep its target interest rate near zero. Yields on U.S. 10-yeae notes, which move inversely to price and have been rising for the past seven weeks on growth expectations, spiked to their highest since January 2020 at 1.754% on Thursday. They were last at 1.6838%. Even though Fed chair Powell was dovish, bond yields have marched high, purely on anticipation that the Fed is behind the curve.

Wall Street ended the week on a mixed note as Treasury yields paused after a busy week. The Dow Jones Industrial Average fell 0.71% to 32,627.97, while the S&P 500 lost 0.06% to 3,913.1 and the Nasdaq gained 0.76% to 13,215.24. Bank stocks lost some luster after the Federal Reserve removed the temporary capital buffer put in place to ease a pandemic-driven downturn last year. The Nasdaq rose after Facebook Chief Executive Mark Zuckerberg said Apple Inc. imminent privacy policy changes on ad sales would leave the social network in a “stronger position.” Optimism about a $1.9 trillion fiscal package and the Fed’s promise to maintain its ultra-loose policy stance for years have accelerated a shift into economy-linked stocks, powering the S&P 500 and the Dow to record levels last week. The Nasdaq is still 6% below its Feb.12 all-time closing peak as growth stocks have lost favor in recent weeks. For the week, the S&P 500 and the Nasdaq lost 0.8% and the Dow lost 0.5%.

Last week’s economic data came in weak but much of the impact is temporary in nature. Retail sales, industrial production and housing starts were weak in part due to the severe winter weather that gripped large parts of the country. Retail sales dropped 3.0% in February, also hit by a payback for January’s stimulus fed 7.6% spurt in January. With checks heading to Americans with over twice the impact of the ones issued in December, retail sales will rebound and adding to goods purchases, service spending will be strong in coming months on pent-up demand.

A similar pattern to the decline we saw in retail sales, industrial production also fell at a noticeable 2.2% rate for February. According to the Federal Reserve, the bulk of the decline can be attributed to the severe weather. While the severe weather caused utilities to jump, mining declined 5.4% and manufacturing fell 3.1%. The factory sector is also feeling constraints from supply chain shortages, especially semiconductors, which have slowed auto production. While weather may have slowed production, demand is solid and industrial activity will pick up. There are no current signs of the bottlenecks easing and price pressures are rising. Manufacturers are passing the rising input costs on to consumers, evident in the ISM surveys, where pricing of components was at the highest since 2018 in March.

The return of winter also did a number on housing starts, which fell 10.3% in February, with the deep freeze in the South led to a 16% decline in single-family starts. Some of the cooling could be linked to rising material costs and now mortgage rates may cool after a period of strong growth. We are likely to see more modest growth ahead after the super-charged growth in most of 2020. Still, rates are low historically and demand for increased living space high, so housing is still going to be a busy sector this year.

U.S. initial claims for unemployment insurance initial increased as a reminder that a full recovery in the labor markets will take time. Initial claims for unemployment insurance benefits increased by 45,000 to 770,000 in the week ending March 13, which includes the payroll reference week. The four-week moving average remains elevated, coming in at 746,250 in the week that ended March 13. Those claiming Pandemic Unemployment Assistance decreased by 196,520 to 282,394. Claims remain elevated, above a million where they have been since the pandemic began.

Next week we get a look at new and existing home sales and durable goods orders.

Latest Data

The U.S. Economy:

The NFIB Small Business Optimism Index rose 0.8 points to 95.6 in February, a small increase but still

Retail sales decreased 3.0% in February but were up 6.3% from February 2020. Sales did follow a strong 7.6% increase in January so some fall-off was expected. The bitter winter weather did affect sales during the month, as well as the fading stimulus impact. Sales excluding motor vehicles and parts fell 2.7% in February and excluding motor vehicle and parts and gasoline were down 3.3% from the month preceding. There was a noted 4.2% decline in sales for motor vehicles and parts. Furniture and home furnishing sales dropped 4.2% in February and electronic and appliance store sales declined 1.9%. Building material sales declined 3.0%. Gasoline stations sales posted a 3.6% increase in February on increased prices during the month. Food services and bars saw sales drop 2.5% but grocery store sales were unchanged. Despite the February decline, sales will bounce back. Some of the stimulus checks passed by Congress and signed by U.S. President Joe Biden will boost sales in March and April. As vaccinations increase and restrictions are relaxed, consumption will increase, especially in the neglected service sectors.

The U.S. is importing inflation but not enough to worry the Federal Reserve that the acceleration in consumer prices over the next few months will be anything but a transitory pickup. Import prices increased 1.3% in February, following a 1.4% gain in January. Imported petroleum prices jumped 11.3% in February, following a 9.9% gain in January. Nonfuel prices were up 0.4% in February, the third consecutive monthly gain. The bog increase in oil prices, plus the rise in other commodity prices is driven by stronger global economic activity. Oil prices have been lifted by supply restraints by OPEC and its allies. U.S. oil production is rising but at a slow pace and still well off of pre-pandemic levels. Oil prices are likely to plateau and limit the effect of the strong advances we have seen the last few months.

Industrial production declined 2.2% in February, following a 1.1% advance in January. Manufacturing fell 3.1% and mining declined 5.4%. Utility output did increase 7.4%. The severe winter weather in the south-central region of the country accounted for the bulk of the declines in output for the month. Most notably, some petroleum refiners, petrochemical facilities and plastic resin plants suffered damage from the deep freeze and were offline the rest of the month. Excluding the effects of the winter weather would have resulted in a loss of manufacturing of about half-a-percent and the index for mining would have increased about half-a-percent. At 104.7 of its 2012 average, total industrial production was 4.2% lower than its year-earlier level. Most market groups posted losses for the month, with the largest being a 14.5% decline in the output of chemicals as a result of shutdowns at plants producing petrochemical and plastic resins. Manufacturing fell 3.1% in February, as the indexes for durable, nondurable and logging fell 2.6%, 3.7% and 0.5%, respectively. Motor vehicle and parts output fell 8.3%, in part driven by the severe weather and shortages of semiconductors. Production will bounce back in March and the near-term outlook remains decent. Orders are still stron,g and backlogs have been increasing, in part driven by low inventories. In the longer-run, more modest increases are expected as the consumer shifts some spending to services. We still have ways to go before reaching pre-pandemic levels for most sectors.

Business inventories increased in January, rising 0.3%, but remained down 1.8% from a year earlier. Among the categories, manufacturing inventories grew by 0.1%, while retail contracted by 0.5%. Sales were up a strong 4.7% in January and up 7.1% from a year earlier. This brought the inventory-to-sales ratio to 1.26, down from 1.32 in December and down from the 1.38 reading a year earlier. The low level of the I/S ratio suggest greater production will be needed in coming months. Inventory levels for February were likely distorted by the severe weather, but the coming months should see strong production.

Mother nature delivered a temporary setback to the U.S. housing market as starts fell 10.3% to 1.421 million annualized units in February. The revision to January was small, coming in at 1.584 million units. Single-family starts declined 8.5% to 1.040 million units, while the multi-family sector saw a 15% drop to 372,000. Weather likely hurt permit activity, which were down 10.5% in February to 1.886 million annualized units. Single-family permits declined 10% to 1.143 million units, while the multi-family component declined to 495,000 units. With weather returning to normal trends, we expect housing activity to have picked up in March and will also keep on the robust path seen in recent months. There some constraints on the industry as input costs keep rising and labor restraints are an issue.


China’s factor and retail sector surged in the first two months of the year, as the economy consolidated its brisk recovery from the pandemic that hurt the economy in early 2020. While the impressive set of numbers were heavily influenced by the very low base from a year earlier, they did show that China’s rebound is remaining intact. Industrial output rose 35.1% from a year earlier and up 7.3% from December 2020. Retail sales increased 33.8%, a significant 4.6% jump from December and the 20.5% contraction for January-February of 2020. China’s ability to contain the virus allowed it to rebound faster than many industrial economies. Exports hit a record pace in February and factory gate prices had their biggest expansion since November 2018. Despite some statistical noise in the latest data, industrial output is up 16.9% and retail sales is up 6.4% compared with the first two months of 2019. Month-to-month data did show a slowdown in sales for January-February 2021, likely due to travel restrictions. Beijing set a modest economic growth target at 6% this year, well below the consensus projection of 8% growth.

Important Data Releases This Week

The February existing home sale report will be released on Tuesday, March 22 at 10:00 AM.  Sales of existing homes advanced 0.6% in January, but severe weather likely will lead to a 2.8% decline for February. The drivers of demand are remaining intact. Mortgage rates are low, although ticking up and demand is high. Consumers want more living space. Sales will be brisk this year and limited by supply.

The February new home sales report will be released on Tuesday, March 23 at 9:15 AM.  New home sales rose 4.3% in January to 923,000 homes. New homes sales likely will see a weather-related 4.6% decline for February. Mortgage applications slowed in February after climbing most of January. Still, sales will be robust this year, despite rising mortgage rates.

The February durable goods orders report will be released on Wednesday, March 24 at 8:30 AM. The factory sector is off to a strong start to 2021. During January, durable goods orders jumped 3.4%. The return of Boeing’s 747 boosted orders and shipments of civilian aircraft. Nondefense capital goods shipments rose 3.2% which means companies are investing at very decent levels for machinery. We expect durable goods orders to increase 1.5% for the month.

The February personal income and outlays reports will be released on Friday, March 25 at 8:30 AM. Personal income and spending surged in January. Personal income shot up 10% as the stimulus checks hit consumer’s accounts. Spending increased by a robust 2.4% in January. Severe weather likely led to a slowdown for February, projected to fall 6.0% for incomes and 1.0% for spending for the month. With more stimulus heading for consumers, the income and spending sector will rebound in coming months. As more restrictions are relaxed, service spending will return at likely robust levels.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.

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